Taking the Wraps Off the New Rhapsody

June 30, 2008

Digital media concern RealNetworks (RNWK) will announce on June 30 a sweeping expansion of its music store, including the launch of its long-awaited partnership with Verizon Wireless that will bring its Rhapsody music subscription service to millions of Verizon Wireless customers.

Additionally, RealNetworks will join the ranks of online music sellers like Amazon (AMZN) in selling MP3 music files without copyright-protection lock technology known as digital rights management, or DRM. Amazon has been selling DRM-free MP3 songs since last year. RealNetworks will begin aggressively marketing its new offerings under the phrase “Music Without Limits.” News Corp.’s (NWS) MySpace indicated earlier this year that it will sell MP3 songs to its users [BusinessWeek, 4/3/08].

RealNetworks will also begin offering unprotected MP3 songs from the four major labels, including Sony BMG Music Entertainment, Warner Music Group (WMG), EMI, and Universal Music Group. Apple (AAPL) has been offering DRM-free songs via its iTunes store for some time, but as yet has only EMI in its corner. Rhapsody’s songs, as MP3 files, will be compatible with practically every digital player on the market, including Apple’s iPod and iPhone product families. Its catalog of DRM-free music will rival that of Apple’s.

Sharing Through Social Networks On top of all that, RealNetworks will also announce a series of partnerships with companies like iLike, the popular music-oriented social network. That will allow iLike users to purchase songs directly from Rhapsody via iLike. Among the benefits to iLike users will be the ability to share full-length songs with friends from social networks, and Rhapsody will be added to the options of iLike’s “buy” button. Up to now, iLike users have generally been able to share only 30-second samples.

Its applications work on social networking sites like Facebook, MySpace, Google’s (GOOG) Orkut and Bebo.

Analyst Michael Gartenberg of Jupiter Research called the series of deals another example of the industry banding together in order to compete with Apple. “It also marks a major milestone in the evolution of DRM-free content,” he says. “It’s interesting to see yet another music store being permitted to sell DRM-free music that Apple is not yet permitted to sell in a DRM-free manner. This begs the question ‘Why?’”

The moves comes only days after Apple disclosed that it had sold its 5 billionth song since the 2003 launch of its iTunes store, and mere days before Apple is due to release the second iteration of its iPhone.

Transition from Subscriptions Until this point, Rhapsody has generally been known as a subscription service, where customers buy memberships for a monthly fee, usually $12.99, then check out music from the service and listen, mostly from their PCs. The company says it delivers about 5 million songs a day to its subscribers. For $2 more per month, customers can put their music on portable digital players, including those from SanDisk (SNDK).

Rhapsody has also been available via other networked devices, like Tivo’s (TIVO) set-top TV boxes and Sonos’ ZonePlayer devices, among others.

Despite its inroads with various devices, Rhapsody has generally struggled to gain traction against Apple and iTunes. Gartenberg says even by offering DRM-free MP3 songs, making bold gains may be hard.

“For most people the DRM argument is not important. As long as what they are getting from iTunes works on their iPods and iPhones, they’re happy and really don’t care about whether or not a song has or doesn’t have DRM protection,” points out Gartenberg. Still, it is likely to boost some sales that otherwise would have been lost to iTunes.

RealNetworks executives say it’s not uncommon for Rhapsody customers to first find music they like on Rhapsody and then buy it on a permanent basis on iTunes. Adding the option to purchase iPod-compatible MP3 songs makes it more likely that those sales will be completed on Rhapsody and not on iTunes. “This is the first time we have been able to go directly after the iPod audience,” says RealNetworks Vice-President Neil Smith.

The Verizon Key Getting its subscription service available to millions of Verizon Wireless subscribers via the V Cast service could also potentially widen Rhapsody’s reach, says Jupiter’s Gartenberg. “Verizon’s 3G wireless network is more than adequate to handle the demands of the service,” he says. “It essentially means that Rhapsody’s 5 million songs will be available on Verizon phones. It could turn out to be significant because it gets Rhapsody off the computer and off the various niche devices it works with and onto mainstream consumer electronic devices.”

Verizon Wireless — a joint venture of Verizon Communications (VZ) and Vodafone (VOD) — offers several phones from Motorola (MOT), Samsung Electronics, LG Electronics, and others that work with the V Cast service, which is offered on top of its basic voice service plans.

RealNetworks’ tieup with Verizon is a culmination of an alliance that was first announced last year. Real, Verizon, and Viacom’s (VIA) MTV Networks said they would team up to create an integrated online music service. Since then Rhapsody took over the operation of MTV’s then-fledgling online music store. Earlier this year, RealNetworks acquired the assets of Yahoo Music (YHOO) and has been migrating its customer base to Rhapsody.